Science, Technology and Innovation

for Sustainable Development

Keun LeeDirector, Center for Economic Catch-up

Professor, Seoul National University

21 March 2013

Side Event

Background ECOSC: theme of 2013 AMR

= STI for promoting sustainable development and achieving the MDGs CDP to examine and make recommendations on this

theme at its 15th plenary session

3 dimensions of sustainable development:1) Economic; how to sustain economic growth

> poverty trap; middle income trap2) Environmental: ecological and climate crisis 3) Social: inequality; exclusion; inclusive development

2 Simple Goals How to use STI

-> to make economic growth sustained, rather than short-lived

(assuming it also helps social dimension of SD;b/c growth collapse is one reason for inequality)

How to use STI -> to change the current ‘environment-unfriendly’growth trajectory into more environment-friendly growth

• But gradual shift to new growth; -- not to scrap old industries in the South right away

but first to make them more STI intensive

Specifically,

1) Policies to advance STI capabilities of the latecomers to sustain economic growth

2) Application of STI in transformation of industrial structures in developing countries,

- while meeting environmental objectives. 3) Latecomers in a position to leapfrog into environment-

saving technologies to take a different path of development than the old path of the current North.

4) What can be done to achieve these

Several Challenges

1) Middle income trap, poverty trap, and the adding-up problem

2) Environment-friendly development;-- level of human activity: threatening to surpass the limits of the Earth’s capacity;

-- the South to bear 75% of costs and more vulnerable

3) Intellectual Property Rights: incentive or barrier for Catch-up Development?

Middle- and Low-income Traps: connected

7

Middle income Trap and Adding up problemMIT =middle-income countries face a slowdown of

growth; -- caught between low-wage manufacturers and

high-wage innovators.

Adding-up problem:developing countries flood the market with the same goods that they produce well,

-- resulting in a decrease in the prices of these goods and less profits (Spence, 2011)

Why the Middle Income Trap important?

1) 70% of World Poor in MICs2) It is future of the LICs

3) MIT linked with the adding-up problem.(Eg; adding up in flower industries in E Africa)Eg) China needs to go quickly beyond the low-end goods based growth, so that it may leave

rooms for other low income countries

To be free from adding-up, you got to differentiate your products

–>need to have innovation capabilities

Weak STI (weak R&D) as Source of the MIT( flat R&D/GDP ratio for MICs)

10

Different Factors at different Stages(Lee and Kim 2009 WD)

1) For lower income & lower middle income countries:

Secondary education & institutions mattered;+ basic infrastructure (SOC)

2) For upper middle and higher:

a) college education and innovationb) big business (Lee et al ; JCE) mattered

11

Theoretical Framework for Catching-up and Leapfrogging

Development

Latecomers’ Advantage (Leapfrogging)vs. Forerunners’ Trap

• Leapfrogging: Perez and Soete (1988)

->Emerging technological paradigms = a window of opportunity

-> not being locked into the old technological system and thus being able to grab new opportunities in the emerging industries. for the catching up country,

• Cf) Forerunners’ Trap: locked into exiting technologies due to the sunk costs of their investment.

2 Kinds of Latecomers’ Advantage1) Advantage in Mature Industries (Gerschekron)-> possibility of low cost-based entries without bothering to

bear the burden of R&D costs-> you can adopt most up-to-data facility or products

2) Advantages in Emerging Industries-> entry at an earlier stage with the same entry costs

but without the sunk costs or being locked into old technologies.

-> Leapfrogging

3 Patterns of Technological Catch-up (Lee & Lim 2001)

Path of the Forerunner : stage A --> stage B --> stage C --> stage D

Path-Following Catch-up : stage A --> stage B --> stage C --> stage Deg. PC, some consumer goods, and Machine Tools

Stage-skipping Catch-up (leap-frogging I) : stage A ---------------> stage C --> stage D

eg. Hyunda's fuel-injection engine (cf. carburetor engine)Samsung' 64 K D-Ram production technology; 256 K D-ram design technologyTlephone switch in in China

Path-Creating Catch-up (leap-frogging II)stage A --> stage B --> stage C' --> stage D'

eg. CDMA development, digital TV( Notes: C and C', represent competin technologies.)

3 strategies in Graphs

• Path-following = start from generation 1stage-skipping = from generation 3 (most productive and stable)Path-creating = from generation 4 (emerging technology)

Solar power cost; now reduced $1 per watt ,cheaper than diesel; affordable to the South

2nd G: thin-film solar cell

1st G: amorphous silicon cells

Cost of solar PV cells, falling 45% per yearSource: BNEF Bazilian et al (2012), Fig. 1

China enters

17

Now Another Paradigm Shift

1) New Energy Revolution (Renewable Energies)to replace fossil-fuel

2) Fusion of Technologies (IT, BT, NT,) in search for new solutions

-> Best Time for Leapfrogging and

already happening;former latecomers are no more latecomers

Stage-skipping and Leapfrogging in the Environmental Kuznets Curve

Source: adapted from Assefa (2011)

Examples of Leapfrogging 1Wind-Turbines, Solar power, Solar Thermal Heating in China

Wind Turbines- By early 2000s, China relied heavily on European suppliers for most of the

production and parts -- but localized much of the production process and required inputs owing to

national procurement policy and local content requirements. -- China became the leader by 2010.

Solar thermal heating in China (developed by Tsinghua Univ)- Rural area bypassed the stage of gas or electricity based heating but

leapfrogged into solar thermal based heating. -- Solar water heater = huge disruption on the existing residence style of

urban dwellers,whereas rural areas: no such lock-in. Leapfrogging driven not by supply-side (technology)

but by mismatch with the demand side

Examples of Leapfrogging 2Bio-Ethanol and Bio-Diesel in Brazil

Brazil: green industrial restructuring Technology for ethanol production was initially imported

and rapidly localized with subsidies on alcohol and ethanol

- and then diffused rapidly through the R&D efforts of Brazilian Agricultural Research Corporation, EMBRAPA.

This public entity maintained a technological watch on global developments and utilized advanced technological methods for researching Brazil’s sources of comparative advantage,

- e.g. soils suitable for sugar cane cultivation as revealed by satellite surveillance.

Mozambique: from Black to Green Development

Mozambique: state oil company Petromoc (modelled on Petrobras) has partnered with the Portuguese oil company Galp and local company (Ecomoz) in a $19 million investment to produce biodiesel from jatropha. Up to 50,000 hectares of land will be dedicated to the

project. Endowed with land, sunshine and adequate rainfall. Good prospects to become a bio-fuels powerhouse, which

could reduce the country’s dependence on imported fossil fuel, contribute to diversify exports These projects financed by its Coal Exports -> (Turning Black into Green) Also, South-South Cooperation: help from India & Korea

Nigeria: Solar power In desert grasslands rural area

Jigawa State in Nigeria: No water supply in this semi-desert area

Traditional options:-- Open wells with rope and bucket; hand pumps;or Government supplied diesel-powered pumps that work only until they break down or until villagers run out of money to buy the expensive diesel.

Now, solar-powered pumps designed to run maintenance free for eight to ten years or more Solved the problem

Need incentives/promotion For early adopters/developers

Market-based approach:- Often not adequate to bring in necessary new technologies and replace unsustainable old ones in the remaining time frame before irreversible environmental damage occurs Policy intervention: justified to correct market failures and

make green technologies more profitable than less sustainable ones.

India’s Solar power- Jawaharlal Nehru National Solar Mission (NSM)

-- used competitive reverse bidding for tariffs (rents).

24

STI Policy for National Development

The 3 Failures as Justification for Gov’t Activism

Market failure System failure Capability failure

Focus Market institutions Interaction among actors Actors (firms)

SourceKnowledge as

public good

Cognition failure

from tacitness of

knowledge

historically given;

No learning

opportunity

Example

problemSub-optimal R&D R&D impact: low No R&D

Solutions R&D subsidiesReducing cognitive

distance

Access to knowledge

and help in learning

School

AnalogyTuition support Making more friends

Targeting student

learning

RelevanceDeveloping and

advanced countries

Developing and

advanced countries

More unique to

developing countries

From Keun Lee, a coming chapter in Stiglitz & Lin eds,

Policy to cultivate directly capabilities of private firms

• To raise “capability failure” as a justification for gov’t activism,

• To suggests ways to cultivate capabilities of firms.-- In developing countries where firms have a low R&D

capability, a safer way of doing business is to buy or borrow external technologies or production facilities, as well as to specialize in less technical methods or assembly manufacturing.

• To move beyond such states (middle income trap),-> effective policy to include not the simple provision of R&D

funds but various ways to cultivate R&D capability itself.

Stage I Stage II (crisis) Stage III Stage IV

Stages Duplicative Duplicative Creative Real of Catch-up Imitation Imitation Imitation Innovation

OEM OEM ODM/OBM OBM

Patterns of Path-following path-following/ stage-skipping path-leading/ Catching-up stage-skipping path-creating

Learning Objects

operational skills

production/process technology

design technology

Product Developmenttechnology

Stages of Knowledge Learning/ Creation and Catch-up

Learning Learning by by producing/ How to Learn: Co-developmentMechanism doing organizing crisis-> strategic alliance

following foreign in-house R&Ddesigns Overseas R&D

P&P R&D consortium

Government: R&D by Public labs

(ETRI in Korea)

Private: Manufacturing(private Co’s:

Samsung, LG in Korea)

Government: Market protection

or Procurement( local telephone authorities)

Learning how to DesignBy Gov’t-Private-Gov’t (GPG1):

eg) Telephone switch development in Korea & China

India & Brazil had the same development but not sustained without initial protection;

=> Infant protection still matters, together with joint PP R&D

G: R&D by Private & public labs

P: Manufacturing

G: Procurement

or Standard Policy

Leapfrogging into Emerging Technologies By GPG2eg) Korea: Digital TV, mobile phones (CDMA) ;

China: 3G TD-SCDMA, Photovoltaic; electric vehicles

Policy tools: Standards policy matter, eg), exclusive standards in wireless.

Government: R&D by a SOE and GRI (KIST)

No Private Sector: But later privatization

Government:

Tariffs& demand industries

(autos, sheeps)

GPG0 (GG) in Steel (POSCO: a SOE)

Production & R&D by SOEs

1st Stage GPG0 F-L-G0Tech Trasnfer/R&D PRO/Foreign Actor Foreign Cooperation partner

production SOEs/:Pirvate firms Local firm (private, SOEs)market promotion/protection Gov't Gov't

2nd Stage GPG1 FL-P-G (FLG1)R&D PROs/Univ.s Joint R&D by foreign & Local

PROs/firmsproduction private firms Local Private Firmsmarket promotion/protection Gov't Gov't

3rd Stage GPG2 G-P-G2 (FLG2)R&D public & Private Joint

R&D Local public & Private Joint R&D production private firms Local Private Firmsmarket

promotion/protection Gov't Gov't4th Stage GPG3 (PG) G-P-G3 (FLG3)

R&D private firms Local Private Firmsproduction private firms Local Private Firmsmarket

promotion/protection None None

From GPG model to FLG (Foreign actor-local firm-Government) Model

Examples of F-L-G Model:Green Revolution & SRI

1) Green Revolution: saved over a billion from starvation.

• R&D & diffusion : performed by a int’l network: -Consultative Group on Int’l Agri. Research (CGIAR).

• In response, Governments/regions expanded roads, irrigation systems and electrical power supply ---to support farmers to adopt the new technology.

• International lending: also prioritized for this 2) System of Rice Intensification (SRI): in 40 countries

SRI first assembled in Madagascar in 1983;- but spread to the world with Cornell Univ. participation-- India one of the biggest beneficiaries

Two kinds of upgrading via capability building

1) Upgrading in the same Industry(moving into higher value segments)

= intra-industry diversification

2) Upgrading by entry into new (higher VA) industrieswhich results in inter-industry diversification

-> Examples from East Asia

3 Stages: OEM – ODM – OBM :Upgrading in a given sectorinto higher value segments

Assembly/Production

Design (R&D) Marketing

OEM 0(own equipment)

ODM 0 0(own design)

OBM 0 0 0(own brand)

Often not easy or quite difficult;Many stuck in OEM Trap (low end good production)

Foxxcom for Apple

Apparel; sweat shops

35

0

10,000

20,000

30,000

40,000

50,000

60,000

매출액 (백만원) 10,257 14,83919,243 16,225 14,105 18,10018,001 17,999 33,275 39,66744,983 43,643 48,588 52,83846,658

89년 90년 91년 92년 93년 94년 95년 96년 97년 98년 99년 00년 01년 02년 03년

Trends of Sales by Aurora World

with 1992 the year of own brand marketing

showing “U” shaped OEM trap over 1991-97

(unit: million Won)

Crisis/ trap

Upgrading in the same industry:Value Chain in Semiconductor Sector

I C W a f e r

M a t e r i a l s

I C F a b r i c a t i o n

E q u i p m e n t

I C M a s k

I C D e s i g n I C T e s t i n g

V a l u e - a d d e d c h a i n

I C P a c k a g i n g

High value-added Low value-added

Korea’s Entries into New Industries:Composition of Major Export Items, (% Share)

3 Steps along the Catch-up Process

1) Acquiring Design Capability(to move beyond OEM/assembly)

2) Targeting/Enteringthe mature/medium short- cycle sectors

or low-end segment of short cycle Sectors

3) Leapfrogging into New/Emerging Technologies

in the Short-cycle Sectors

39

40

Diversification by moving into shorter cycle technology sectors

Tech. turning point

Suggested Examples of Upgrading in AfricaUpgrading in the same Industry

Make Flower/Coffee Higher value-added using STI(entry into more & higher value segments)

eg) Make flower insects/disease free; last longerwith specific flavour/smells

Coffee: from crude coffee to processed coffeepromote your own brand: “Kaffa”

“Kaffa Inside” like “Intel inside”

In both: enter into R&D & distribution/marketing segments rather than just production

Second Kind upgrading in Africa**Upgrading by entry into new industries

related /unrelated diversification a) entries into seed/ plant variety industries

to save or generate royalty incomes;b) into IT services (eg: India as benchmark)

Lower entry barriers( ->English speaking IT manpower)

c) into manufacturing from mining:eg Nigeria: oil refineries; Botswana: Diamond polishing

d) at later stages: entries into genetic engineering; biotechnologies (fusion of IT and biology)

Concluding Remarks

Overall Message Now = paradigm shift in energy and climate change

-> offering potential for leapfrogging by the South. However, to realize this potential,

need to build up technological capabilities and have enhanced access to global knowledge .

Reviewed the experience of selected developing countries in capability building and policy options

To find: while private firms emerge to play critical roles, Governments provided strategic framework to nurture the growth of the both old and new industries.

-> From G-P-G to F-L-G Model of Stages of Capa. Building

Recommendations 1) Environment-friendly technologies as global public goods; to

be promoted by shared incentives for early adoption. 2) From protection of IT to more use of IP:- Broad research exemption for experimental users;- Judicial power to require nonexclusive licensing in the spirit

of anti-blocking or public interest;- petite patents (utility model) as alternative IPRs

3) Latecomers: Policy space to nurture their local firms( need to reform of global rules and governance)

4) New forms of cooperation and technical assistance:such as LFPs, STI doctors ; UNIDO programs

5) Potential for South-South cooperation in the area of technology transfer and leapfrogging.

47

References (www.keunlee.com)

• Lee, Keun, 2013 (in print), Schumpeterian Analysis of Economic Catch-up: Knowledge, Path-creation and middle income trap, Cambridge Univ. Press

• Lee, Keun, & BY Kim,”Both Institutions & Policies matter but differently at differnent income levels: long run economic growth,: World Development (2009)

• Lee, Keun, & C. Lim (2001), “Technological Regimes, Catching-up & Leapfrogging: the Findings from the Korean Industries”, Research Policy, 459-483.

• Lee, Keun, “Asymmetric Protection leading to not Productivity but Export Share Changes: the case of Korean Industries, 1967~1993,” (with H. Shin), Economics of Transition, 2012 no. 4.

• Lee, Keun, C.Lim, and Wichin Song (2005), "Digital Technology as a Window of Opportunity and Technological Leapfrogging: Catch-up in Digital TV by the Korean Firms”, Inter.J. of Tech. Management, Vol. 29, 1/2, pp. 40-64.

• Lee, Keun, “Making a technological Catchup.” Asian J.of Tech. Innovation, 2005.• Lee, Keun, “From the Washington Consensus to the BeST Consensus for World

Development (with John Mathews),” Asian-Pacific Economic Literature, May 2010.• Kim, YK, Keun Lee, W. Park, K. Choo, Appropriate Intellectual Property Protection and

Economic Growth in Countries at Different Levels of Development," Research Policy 41, no 2: 358-75.March 2012